Sector Insight: Smoothies - Opportunity beckons

The smoothie market is booming, but there is still scope for innovation from the sector's giants.

THE BACKGROUND

The promise of another long, hot summer, combined with diet and health concerns, means the UK smoothies market is thriving.

Although PJ Smoothies created the market here, it has recently been overtaken by the creative and energetic Innocent brand. Unusually for the soft-drinks sector, the major corporations have had a chequered history in this segment and it remains the domain of the entrepreneur.

Smoothies have become one of the UK drinks market's most dynamic sectors thanks to a desire for healthier lifestyles and a growing preference for snacks in drink form.

Two years ago Mintel estimated the UK smoothies sector to be worth £30m in retail sales. By May 2004 research by Zenith International suggested sales were more than double this at £69m, and that the UK market for smoothies could top £150m by 2008.

Smoothies are drinks based predominantly on whole crushed fruit, are usually chilled and have a short shelf life. They were introduced to the UK 10 years ago and in the early years were a niche, urban product with sales concentrated in London and the South-East.

Consumer interest has grown significantly in recent years thanks to growing interest in health and the emergence of functional foods. As a result, supermarket chains have started to stock branded products and develop own-label lines, and smoothies consumption has gone national and mainstream.

Sales of smoothies rose 40% for the year to 2003 despite their premium price, according to 'Soft Drinks in the United Kingdom 2004', a report published in April by Euromonitor. With an average price of £3.70 a litre, smoothies are one of the UK's costliest beverages. This price premium is proving sustainable because most smoothies have a high content of pure fruit, which persuades consumers to pay more for what they consider to be a better quality product.

Growth potential

Smoothies can be divided into fruit-based products - accounting for more than 80% of volume sales in 2003, according to Zenith estimates - and dairy-based smoothies.

New areas of growth include functional 'super smoothies', low-fat, alcoholic and organic varieties. In the US, carbonated smoothies and smoothie lollies are already available.

Unlike other drinks sectors, the smoothies business is led by a collection of small, specialist operators with targeted, niche offerings. Key brands in the UK include the country's first smoothies brand PJ, which launched in 1994, Innocent, and The Juice Company.

Today, Innocent is the brand leader with turnover last year of £10.6m - ahead of PJ's £9.45m - and a market share of more than 30%, according to ACNielsen Scantrack. Innocent, which is stocked in more than 4000 outlets across the UK and France, now comprises 17 different products.

'The UK smoothies sector is growing fast due to the growing interest consumers have in healthy products and the fact that smoothies represent an everyday luxury for many consumers.' says Innocent co-founder Richard Reed. 'We believe we are a driving force behind this growth. Rather than using fruit concentrate we take what nature provides and don't mess around with it.'

'While we are outspending our rivals on marketing - the budget is £2.5m this year, a drop in the ocean for mass-market brands such as Coke - our philosophy remains that the best investment is in the product; 90% of our marketing strategy goes into the bottle.'

While Innocent's range now includes yoghurt drinks and so-called 'juicy waters', Reed insists smoothies remain his business' main focus and that the UK smoothies sector still offers considerable potential for further growth.

'When you consider that 80% of the juice market is in take-home packs and 90% of the smoothies market is in one-stop bottles, you can see how huge the growth potential of take-home for smoothies is in the UK,' he says. 'This, along with smoothies specifically designed for kids, will be two areas of growing interest for us in the future.'

Overall, the market's key players have changed little over the past year or two. While retailers' interest in own-label smoothies is growing, independent companies dominate.

Problematic margins

Larger, more established drinks companies have struggled to establish their position. Major brand names such as Ocean Spray, Ribena and Tropicana have entered the market only to subsequently withdraw.

'Typically, big businesses cannot get their smoothies to a realistic price to meet their desired margins without stripping out costs - in other words, the fresh fruit that make the product what it is,' observes Reed.

Mass marketing is not widely seen as the most effective way to sell smoothies to British consumers. Many brands have had minimal above-the-line activity in recent years.

Instead, the emphasis among manufacturers is for consumers to experience the taste for themselves, and sampling, as well as point-of-sale, are the key focus of activity. One reason for this is the dominance within the market of small, independent companies that only now are in a position to spend on advertising.

Another reason is that smoothies consumers tend to be discerning, advertising-literate and wary of food company claims; the fear is that by overtly selling the product it could turn off some consumers. This, however, is likely to change as the market matures.

Innocent only advertised for the first time last year, but has committed to spending £2.5m on advertising in 2004. This is more than its total marketing expenditure for its first five years in business.

Spread the word

An ongoing concern for the sector remains consumer ignorance of what smoothies actually are. Some 41% of consumers interviewed by Mintel in 2002 had never heard of them.

This is being counter-balanced by a marked increase in interest among consumers in all demographic groups to adopt healthier lifestyles and growing consumer preference for liquid snacks.

'Smoothies are just part of the perceived healthy-living trend,' says Verdict Research senior retail analyst Steve Gotham. 'They've grown from a very small base and now have significant distribution in leading grocers. I'd like to see them stocked in pubs and bars.'

UK CHILLED JUICE MARKET BY SALES, YEAR TO MARCH 2004

Sales Share

(pounds m) (%)

1 Fruit juice 413.3 92.8

2 Smoothies and yoghurt drinks 31.1 7.0

3 Other 1.0 0.2

4 Total chilled juice 445.4 100

Source: ACNielsen Scantrack/Innocent

UK SMOOTHIES BRAND SALES BY VALUE

2001 1999

(pounds m) (pounds m)

1 PJ Smoothies 12.0 5.0

2 Innocent 7.0 0.5

3 Own-label 6.5 4.0

4 Others 4.5 3.5

5 Ribena* n/a 2.0

Source: Mintel * withdrawn in 2000

SMOOTHIES AND YOGHURT DRINK SPEND YEAR TO DECEMBER 2003

Brand Creative agency Media agency Spend

(£000)

1 Yakult cdp-travissully BJK&E Media 4606

2 Danone Actimel RKCR/Y&R Carat 4603

3 Muller Vitality Publicis ZenithOptimedia 1616

4 Innocent Fallon London OMD UK 240

5 Friesland Fristi In-house Brand Connection 227

6 PJ Smoothies TBWA\London Pure Media Group 77

Source: Nielsen Media Research

TAKE-HOME vs ONE-SHOT SALES (pounds m)

Chilled yr to yr to

juice market 20/3/4 20/3/3

Take-home 392.0 330.0

One-shot 54.0 47.0

Smoothies & yoghurt

drink market yr to yr to

20/3/4 20/3/3

Take-home 11.5 8.5

One-shot 19.7 18.2

Source: ACNielsen Scantrack/Innocent Drinks

ANALYST COMMENT

Gary Roethenbaugh, Research director, Zenith International

Undoubtedly it is a market driven by entrepreneurs - which goes against the grain in soft drinks. This is because the majors have not been able to make smoothies work yet.

The reason for this is the premium nature of the product. When delivering quality it helps if you focus your business on producing one thing and keep reinventing the category to maintain consumers' interest.

The ambient products introduced by some majors miss the point of what smoothies are all about. They also often feature brand names associated with other sorts of drinks. Expect more from the majors, either with the creation of brands or the acquisition of existing ones. And there will be a lot more activity from retailers because we have yet to see a balance between own-label and branded smoothies.

However, smoothies do need a bit of theatre in the retail environment, and that is not traditionally what own-label lines are about.

In the meantime, product innovation will continue to drive the sector.

This is likely to come from products featuring more varieties of fruit, fruit and dairy blends and the rise of functional products.

The challenge will be to find the right balance between natural functional products, such as herbal smoothies, and artificial - probiotics in PJ's Tummy Love, for example. Given that smoothies are positioned as natural drinks, just how the functional smoothies are marketed will be key.

The US smoothie market is already established. Frozen smoothies is obviously one way the UK market could go. But it could also be the case that smoothies work best at their simplest: as a premium, branded natural drink.

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